NFTs used as loan collaterals

14 October 2021

DeFi platforms lending cryptos and accepting NFTs as loan collaterals are one of the latest trends in the Blockchain niche.

Non-Fungible Tokens guarantee artists and collectors the ability to trade a wide variety of assets in nearly real-time, but there’s way more in their future, and it’s only a matter of time before they become one of the most exchanged assets on the blockchains.

Using them as a loan collateral is the beginning. Let’s see more in detail how it works.

The main loan platforms on the market

One of the main lenders accepting NFTs is DeBank, a brand of ETNA Network, already famous among gamers for its experimental program of integrating games on a blockchain.

If this works, and NFTs become part of this ecosystem, players will be available to exchange in-game assets and literally own them, which is revolutionary.

What ETNA is doing is creating an ecosystem where all their apps are interconnected and linked one another by the ETNA tokens. DeBank loans are part of this.

At the moment, DeBank runs on Binance, but it’s quickly expanding and they’ll soon support other blockchains. According to CoinTelegraph, Polygon is the next one in line.

At the moment, the platform supports ETNA, BNB, ETH, BTC, BUSD, USDT, DAI and more will be integrated soon. Interest rates change according to the type of asset offered as a collateral. As the project develops, more NFTs will be accepted.

Icing on the cake: ETNA is working on getting a license to issue debit cards.

Another interesting platform is NFTfi, which works with ETH and any ERC-721 token can be used as a collateral.

The system is pretty easy: when you subscribe to the platform, you can put your NFT up for collateralisation and other users can offer you a loan.

You’ll receive loan proposals for you to accept or decline and if you do accept one, a smart contract is activated: you get the funds in ETH and your NFT is locked.

After you repay the loan, the smart contract will unlock your NFT and you’ll get it back. If you don’t repay the loan on time, the lender gets the NFT.

Lenders, on the other hand, either get an NFT or their ETH back plus a little more as a return.

Is it always convenient?

Well, it depends. There’s been a recent case of an NFT offered as a collateral for a 3.5 ETH loan on NFTfi that changed hands after the borrower didn’t repay the loan.

Basically, what happened is that an Elevated Deconstructions NFT worth about 3.25 ETH, but part of a collection worth 11 ETH, at that time was offered as a collateral for a 3.5 ETH loan.

When the loan expired (the due date was set to 3 months after the loan), the NFT changed hands, but something happened in the meantime: the value of the NFT raised exponentially. At the moment, the value of each NFT from that collection is more than 95 ETH and it’s still raising!

Apparently, the lender made the best deal of their life. In fact, it may not be so.

According to The Block, no Elevated Deconstruction NFT was sold in the last three weeks, and there’s some chance that the borrower decided to get some liquidity in place of their NFT because they couldn’t sell it. This theory is supported by the fact that it’s not the first time this NFT is transferred as a consequence of an unpaid loan: the borrower got it the same way and then put it up for collateralisation.

This might be a loophole worth investigating and probably regulations will be needed to prevent similar occurrences from happening in the future.

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